Business valuation

A business valuation answers a deceptively simple question: what is this company worth? For a private family company there is no share price to look up, so the answer has to be estimated. Valuers typically use one or more general approaches: what the business is expected to earn in future, what similar businesses have sold for, and what its assets are worth. They then apply judgement about risk, growth and the particular stake being valued.

How it shows up in a family business

Family companies need valuations at many points, and often for different reasons:

• Ownership transfers to children or into a trust.
• A buy-sell agreement, which may set the price by valuation when an owner dies or leaves.
• A sale or liquidity event, including a management buyout or an ESOP.
• Disputes between family owners.

A common confusion is to treat “the value” as a single number. The same company can be valued differently depending on the purpose, the standard of value used, the date and whether the stake is a controlling or minority one. Two valuations that disagree are not necessarily wrong.

Why it matters for preparing a successor

Valuers and buyers look closely at how much the business depends on one person. When customers, lenders or key decisions rest on the founder, that dependence is a form of key-person risk, and it can weigh on what a buyer or valuer believes the company is worth. A successor who already holds key relationships and leads the senior team with authority makes the business less dependent on any one person. The article does your company depend too much on you? looks at the signs.

This is a general definition only. The family should involve a qualified valuer, its accountant and its lawyer whenever a valuation is needed.